There are several types of private trusts. In this chapter, I will discuss several of the most common types. One of the primary legal issues that arises as a consequence of the existence of trust is whether the beneficiary’s creditors can attach the funds in the trust. Frequently, distributions from the trust may be the beneficiary’s only source of income. Therefore, getting access to the trust funds may be the sole way for the creditor to get paid. In this chapter, I will describe the types of trusts in relation to the creditor’s ability to get paid. A mandatory trust is one that mandates the trustee to distribute all the income and does not give the trustee the discretion to choose either the beneficiaries or the amount to be distributed. The trustee’s sole job is to manage and disperse the trust funds. An example would be: T leaves $500,000 in trust to X to distribute $20,000 of the income to A and B annually. A and B can go to court to force the trustee to give them the promised amount. The money in a mandatory trust is similar to earned income, so the beneficiary’s creditor can file an action against the trust for the amount of the debt.
Lineback v. Stout, 339 S.E.2d 103
Respondent argues that it was the testator’s intention in Article IV of his will to create a discretionary trust wherein payments to petitioner were to be in the sole discretion of the trustee and that the superior court erred in ruling to the contrary. A discretionary trust is a trust wherein the trustee is given the discretion to determine whether and to what extent to pay or apply trust income or principal to or for the benefit of a beneficiary. Bogert, The Law of Trusts and Trustees § 228 (rev. 2d ed. 1979); Scott, The Law of Trusts §§ 128.3, 155 (3d ed. 1967). Accord N.C. Gen. Stat. § 36A-115(b)(1) (1984). Under a true discretionary trust, the trustee may withhold the trust income and principal altogether from the beneficiary and the beneficiary, as well as the creditors and assignees of the beneficiary, cannot compel the trustee to pay over any part of the trust funds. Bogert, supra; Scott, supra, at § 155. A trust wherein the trustee has discretion only as to the time or method of making payments to or for the benefit of the beneficiary is not a true discretionary trust. Bogert, supra; Scott, supra.
Whether a trust is a discretionary one naturally depends upon the nature of the powers conferred upon the trustee, that is, whether the powers are mandatory or discretionary, and if discretionary, the extent of the discretion afforded the trustee. In determining the nature of the powers conferred upon a trustee, we are guided by the following:
The powers of a trustee are either mandatory or discretionary. A power is mandatory when it authorizes and commands the trustee to perform some positive act…. A power is discretionary when the trustee may either exercise it or refrain from exercising it, … or when the time, or manner, or extent of its exercise is left to his discretion. [Citations omitted.] Woodard v. Mordecai, 234 N.C. 463, 67 S.E.2d 639 (1951).
The court further explained:
The court will always compel the trustee to exercise a mandatory power. … It is otherwise, however, with respect to a discretionary power. The court will not undertake to control the trustee with respect to the exercise of a discretionary power, except to prevent an abuse by him of his discretion. The trustee abuses his discretion in exercising or failing to exercise a discretionary power if he acts dishonestly, or if he acts with an improper even though not a dishonest motive, or if he fails to use his judgment, or if he acts beyond the bounds of a reasonable judgment. [Citations omitted.] Id.
Whether a power is mandatory or discretionary depends upon the intent of the settlor as evidenced by the terms of the trust. See Bogert, supra, at § 552; Scott, supra at § 187. The intent of a settlor is determined by the language he chooses to convey his thoughts, the purposes he seeks to accomplish and the situation of the parties benefitted by the trust. Davison v. Duke University, 282 N.C. 676, 194 S.E.2d 761 (1973). Use by the settlor of words of permission or option, or reference to the discretion of the trustee, in describing the trustee’s power indicates that the settlor intended that the power be discretionary, whereas use of directive or commanding language indicates that a mandatory power was intended. See Bogert, supra, at § 552. Compare Woodard v. Mordecai, supra, and First National Bank of Catawba County v. Eden, 55 N.C.App. 697, 286 S.E.2d 818 (1982) (discretionary power) with Kuykendall v. Proctor, 270 N.C. 510, 155 S.E.2d 293 (1967) (mandatory duty). Where the power is discretionary, the extent of the discretion given the trustee may be enlarged by use of adjectives such as “absolute” and “uncontrolled.” Davison v. Duke University, supra.
The language of the testamentary trust in the present case clearly indicates that the testator intended for the power given respondent as trustee to be discretionary. The testator, in granting respondent the power to distribute the trust income or principal, referred to the “sole judgment” or “discretion” of respondent six times. Such language is used both with reference to the net income and the principal of the trust, thus indicating that the testator intended for respondent to have discretion regarding the distribution of both. This is made particularly clear by the fact the testator referred to respondent’s discretion twice in the first sentence of the trust provisions-the first time possibly referring only to the trust principal but the second time apparently referring to both the net income and the principal of the trust. That respondent’s power is discretionary is also shown by the fact the testator authorized respondent to pay the trust income or principal to or for the benefit of petitioner but did not command or require her to do so. Rather, the testator directed respondent to exercise her discretion regarding the distribution of the trust funds. The testator’s use of the adjectives “absolute” and “uncontrolable” [sic] to describe the discretion vested in respondent further emphasizes the discretionary nature of the power granted respondent and evidences the testator’s intent to vest wide discretion in respondent. To hold that respondent’s power to distribute trust income or principal to petitioner is mandatory, as did the superior court in effect, we would have to ignore totally the references made by the testator to respondent’s discretion in setting forth that power. This we cannot and will not do.
The language and terms of the trust further show that the discretion vested in respondent extends to whether and to what extent to pay the trust income or principal to or for the benefit of petitioner. The amount of trust income or principal to be expended for petitioner’s benefit is to be determined by respondent in her sole discretion. We emphasize, however, respondent’s duty to exercise her judgment reasonably to carry out the intent of the testator. Woodard v. Mordecai, supra.
The terms of the trust also show that the testator intended for the trust funds to be used to supplement, rather than supplant, the financial assistance which petitioner was receiving from the Department of Social Services. Petitioner was receiving the Department’s financial assistance at the time the testator executed his will. The testator was apparently referring to that assistance when he provided for respondent’s consideration of “income available to [petitioner] from other sources” in determining whether to distribute trust principal to petitioner. Such provision certainly tends to show that the testator did not intend for the trust funds to be used as a substitute for the public assistance. Accord Zeoli v. Commissioner of Soc. Serv., 179 Conn. 83, 425 A.2d 553 (1979). The creation of the trust for “the lifetime” of petitioner and the provision for the distribution of the trust corpus remaining upon petitioner’s death also reveal the testator’s intent that the trust funds be used to provide supplemental, rather than total, support for petitioner. Accord Tidrow v. Dir., Mo. State Div. of Fam. Servs., 688 S.W.2d 9 (Mo.App. 1985). These terms of the trust show that the testator intended and anticipated that the trust corpus might not be completely exhausted during petitioner’s lifetime. Id. In order to effectuate this intent, respondent’s power to distribute the trust funds to petitioner must be interpreted as discretionary. If respondent’s power is interpreted as mandatory, the trust fund will be rapidly depleted and the testator’s intent will be thwarted.
We conclude that the testamentary trust is a discretionary one and that therefore the superior court erred in requiring respondent to expend funds from the trust for the general welfare, support, maintenance and benefit of petitioner. The judgment of the superior court is
4.1 Discretionary Trusts
The testator who has more confidence in the trustee may give that person more discretion. Under the terms of a discretionary trust, the trustee has discretion over payments of either the income or the principle or both. In some cases, the trustee has the discretion to choose the specific beneficiaries from a group that the trustee indicates. Unlike the mandatory trust beneficiaries, the beneficiaries of a discretionary trust cannot force the trustee to pay out any of the trust funds. This is an important distinction because if the beneficiary has no right to a payment from the trust, neither does the beneficiary’s creditors. Thus, a creditor of the beneficiary cannot by judicial order, compel the trustee to pay him. Nonetheless, the creditor is not without a remedy because of the existence of the cutting off income rule. According to that rule, if the trustee exercises his discretion and pays the beneficiary, the trustee must pay the creditor who stands in the beneficiary’s shoes. The lien attaches the moment in time between when the trustee exercises his discretion to pay the beneficiary and the time the property is transferred to the beneficiary. This rule also applies when the trustee pays money on the beneficiary’s behalf.
Wilcox v. Gentry, 867 P.2d 281
Ron and Nancy Wilcox appeal from the district court’s judgment holding that any payments made by the trustee of the Frank Gentry Trust (Trust) which are made for the benefit of Isabella Gentry and not paid directly to Isabella, are not subject to garnishment. The Court of Appeals affirmed the judgment appealed from, but reversed, sua sponte, a continuing garnishment order entered by the district court relative to payments made by the trustee directly to Isabella. Gentry 18 Kan.App.2d 356, 853 P.2d 74. The matter is before us on petition for review.
In 1985, Frank Gentry created a revocable Trust. During his lifetime, Frank was the beneficiary of the Trust. Upon Frank’s death certain trust property was to be distributed to named individuals. The residue of the Trust’s assets was to be divided into five equal shares. Four of these shares were to be distributed to the four individuals designated as their recipients. This action concerns the fifth share. The applicable Trust provision in Article III, Section D.5, is as follows:
“(e) One share shall remain in trust until the death of Isabella Gentry. The trustee, in his sole discretion, may make such distributions of income and principal to her or on her behalf as the trustee deems advisable after giving due consideration to all sources of funds available to her. Upon the death of Isabella Gentry, the trust shall terminate and the balance of the trust and accumulated income shall be distributed to the then surviving beneficiaries in proportion to the beneficial interests they would have been entitled to, under D. 5.(a), (b), (c) and (d) above, had Grantor died on the actual date of Isabella Gentry’s death. In the event Isabella Gentry should predecease the Grantor, this share shall be equally divided between Mary Margaret Gentry and Eric Gentry, or pass fully to the survivor.”
The district court and the Court of Appeals characterized the Trust provisions applicable to Isabella Gentry in (e) as being discretionary in nature. This determination is unchallenged herein and we agree we are dealing with a discretionary trust. The Trust contains no spendthrift provision.
Ron and Nancy Wilcox obtained a judgment against Isabell Gentry for fraud in the sale of a residential property. Their judgment was for $40,000 actual damages and $11,667.35 punitive damages. They garnished the Trust to seek satisfaction of their judgment. Frank Gentry, grantor and sole beneficiary during his lifetime, had died previously, thereby activating section 5(e) relative to Isabell.
The district court held that any trustee payments directly to Isabell were subject to garnishment but that trustee payments for Isabell’s benefit were not. The propriety of the district court’s determination relative to payments made for Isabell’s benefit is the only aspect of the judgment from which an appeal was taken.
The Court of Appeals’ affirmance of the district court was based, in part, upon our case of State ex rel. Secretary of SRS v. Jackson, 249 Kan. 635, 822 P.2d 1033 (1991). Reliance on Jackson is misplaced. Jackson involved an action by SRS, pursuant to K.S.A. 39-719b, to compel the Jackson Trust beneficiary to reimburse SRS for public assistance benefits she had received. The Trust was not a party to the action, and the trustee was not being asked to pay anything to SRS. The issue was whether or not the trust had been an “available resource” to Jackson at the time she was receiving public assistance funds for purposes of determining her eligibility for such SRS benefits. Thus, the spendthrift provisions of the Jackson Trust were irrelevant. The case involved only Jackson’s interest in the trust. We held that the trust was discretionary as to payments of principal but not discretionary as to income. Thus, as Jackson had the right to receive the trust income, such income was an available resource to Jackson in determining her eligibility for public assistance.
In Jackson we cited Restatement (Second) of Trusts § 155(1) (1957) and comment (b), which provide:
“(1) Except as stated in § 156, if by the terms of a trust it is provided that the trustee shall pay to or apply for a beneficiary only so much of the income and principal or either as the trustee in his uncontrolled discretion shall see fit to pay or apply, a transferee or creditor of the beneficiary cannot compel the trustee to pay any part of the income or principal.
“Comment b: A trust containing such a provision as is stated in this Section is a ‘discretionary trust’ and is to be distinguished from a spendthrift trust, and from a trust for support. In a discretionary trust it is the nature of the beneficiary’s interest rather than a provision forbidding alienation which prevents the transfer of the beneficiary’s interest. The rule stated in this Section is not dependent upon a prohibition of alienation by the settlor; but the transferee or creditor cannot compel the trustee to pay anything to him because the beneficiary could not compel payment to himself or application for his own benefit.”
Section 155(1) was pertinent to Jackson as we were concerned with the interest of the beneficiary to the trust and her concomitant ability to compel payment to her.
In the case before us, the issue is not whether the trustee can be compelled to pay income or principal. The issue before us is, if the trustee exercises its discretion and makes a payment on behalf of the beneficiary, whether such payment is subject to the creditors’ garnishment.
This makes Restatement (Second) of Trusts § 155(2,) rather than (1), the applicable statement, as it provides:
“(2) Unless a valid restraint on alienation has been imposed in accordance with the rules stated in §§ 152 and 153, if the trustee pays to or applies for the beneficiary any part of the income or principal with knowledge of the transfer or after he has been served with process in a proceeding by a creditor to reach it, he is liable to such transferee or creditor.”
As previously stated, there is no valid restraint on alienation (spendthrift provision) involved herein. This section makes no distinction between payments directly to the beneficiary or on the beneficiary’s behalf.
Pertinent comments to subsection (2) are found therein as follows:
“h. Effect of payment by trustee to beneficiary after assignment. Although in the case of a discretionary trust a transferee or creditor of the beneficiary cannot compel the trustee to pay over any part of the trust property to him, yet if the trustee does pay over any part of the trust property to the beneficiary with knowledge that he has transferred his interest or after the trustee has been served with process in a proceeding by a creditor of the beneficiary to reach his interest, the trustee is personally liable to the transferee or creditor for the amount so paid, except so far as a valid provision for forfeiture for alienation or restraint on alienation has been imposed as stated in §§ 150, 152 and 153.
“i. Effect of applying property by trustee for beneficiaries after assignment. If the trustee applies for the benefit of the beneficiary income or principal, he is liable to an assignee of the beneficiary’s interest or to a creditor of the beneficiary, if he makes such application after he has knowledge of the assignment or after he has been served with process in a proceeding brought by a creditor of the beneficiary to reach the beneficiary’s interest.”
In IIA Scott on Trusts § 155.1, p. 160-61 (4th Ed.1987), the following pertinent discussion appears: “Although the trustee need not pay any part of the trust fund to the beneficiary or to his creditors, but may withhold it entirely, but if he does determine to pay part of it to him, he should pay it to the creditors who now stand in his shoes. The English courts, however, have here made a distinction. They have held that the trustee can properly apply the trust fund for the use of the beneficiary even though he is bankrupt or his creditors have brought a proceeding to reach his interest.
In In re Smith [,(1928), 1 Ch. 915, 919], Romer, J., said:
‘Where there is a trust to apply the whole or such part of a fund as trustees think fit to or for the benefit of A., and A. has assigned his interest under the trust, or become bankrupt, although his assignee or his trustee in bankruptcy stand in no better position that he does and cannot demand that the fund shall be handed to them, yet they are in a position to say to A.: “Any money which the trustees do in the exercise of their discretion pay to you, passes by the assignment or under the bankruptcy.” But they cannot say that in respect of any money which the trustees have not paid to A. or invested in purchasing goods or other things for A., but which they apply for the benefit of A. in such a way that no money or goods ever gets into the hands of A.’ The distinction thus drawn between payment to the beneficiary and applying trust funds for his benefit seems to be arbitrary and without any sound basis in public policy. The result is that the beneficiary is enabled to enjoy the benefit of the trust in spite of his insolvency, as long as the trustee is willing to apply the trust estate for his benefit.”
In Bogert, Trust and Trustees § 228, pp. 524-32 (Rev.2d Ed. 1992), distinctions between discretionary and spendthrift trusts are discussed, and the following is stated relative to a creditor’s ability to reach trust funds:
“If the trust is a true ‘discretionary’ trust, the nature of the interest of the beneficiary, rather than any expressed restraint on his power to alienate or the rights of his creditors, determines questions of voluntary or involuntary alienation. The beneficiary cannot secure the aid of a court in compelling the trustee to pay or apply trust income or principal to him since the terms of the trust permit the trustee to withhold payments at his will. Until the trustee elects to make a payment the beneficiary has a mere expectancy. Nor can a creditor compel the trustee to exercise his discretion to make payments. If the beneficiary attempts to transfer his interest, or his creditors seek to take it, before the trustee has made an election to pay or apply, the transferee or creditor has no remedies against the trustee because he stands in the shoes of the beneficiary.
“If, however, the trustee exercises his discretion by making a decision to pay to or apply for the beneficiary, then the beneficiary can force the trustee to confer such a benefit on him, and he can transfer his right and his creditors can take advantage of it, if the trust does not have a spendthrift clause. If the trustee receives notice of an attempted voluntary transfer, or is served with process by a creditor of the beneficiary, before the making of his decision to allocate trust property to the beneficiary, he will be liable to the assignee or creditor if he thereafter uses his discretion and elects to pay to the beneficiary. In such a case his duty is to pay to the assignee or creditor if he decides to pay or apply, unless the discretionary trust instrument contains a spendthrift clause, or a statute gives rights to the creditor as in the case where the surplus of income over that needed for support is made liable to creditors.”
The above-cited treatises are persuasive. We see no valid reason for treating payments to a beneficiary differently from payments made on behalf of the beneficiary as far as creditors are concerned. If the creditor has the right to reach payments made to the beneficiary excluding payments made on behalf of the beneficiary serves only to encourage circumvention of that right. We adopt Restatement (Second) of Trusts § 155(2) and find it determinative of this issue. The district court and the Court of Appeals erred in holding that only funds paid directly to a discretionary trust beneficiary are subject to garnishment by a creditor.
In their petition for review, Ron and Nancy Wilcox object to the Court of Appeals’ reversal, sua sponte, of the district court’s continuing order of garnishment as to funds paid directly to the beneficiary.
The Wilcoxes did not appeal from this part of the judgment as it was in their favor. No cross-appeal was filed.
The order of continuing garnishment entered herein as to funds paid directly to the beneficiary was in no way an inherent part of the sole issue on which the appeal was taken or necessary to the determination of that issue. Even if such had been the situation, the parties should have been afforded the opportunity to brief the sua sponte issue.
The judgment of the Court of Appeals is reversed. The judgment of the district court is reversed, and the case is remanded for further proceedings.
Notes, Questions and Problems
1. Like the beneficiary of any other trust, the beneficiary of a mandatory trust is a person who may be vulnerable. Further, the money in the trust belongs to the settlor. Consequently, should the beneficiary’s creditors be able to touch the funds in the trust?
2. The cutting off rule is designed to insure that the beneficiary of a discretionary trust is unable to avoid paying his creditor once he receives trust funds. Once the funds are in the beneficiary’s hands, the creditors should be able to be paid.
In which of the following cases is the cutting off income rule triggered:
a). The trustee pays the beneficiary’s electricity bill using the trust funds.
b). The trustee buys the beneficiary an American Express gift card using the trust funds.
c). The trustee buys the beneficiary a diamond ring using the trust funds.
d). The trustee gives the beneficiary’s $20,000 from the trust.
4.2 Support Trust
The purpose of a support trust is to ensure that the beneficiary’s financials needs are met. The support trust can be either pure or discretionary. A pure support trust is one that requires the trustee to use the funds in the trust to support the beneficiary by paying specific bills. The trustee’s discretion is limited. He must use the trust funds only for the beneficiary’s support. Under the terms of a discretionary support trust, the trustee has the discretion to decide how much of the trust funds are needed to support the beneficiary. The trustee’s discretion may be limited by a support standard. For instance, the trust instrument may require the trustee to provide the beneficiary with a reasonable standard of living or to enable the beneficiary to maintain the lifestyle to which he has become accustomed. When exercising his discretion with regards to distributing money to the beneficiary, the trustee has a duty to inquire to determine the amount of support that the beneficiary needs. Since the purpose of the trust is to provide support for the beneficiary, he cannot alienate his interest in the trust. Thus, the beneficiary’s creditors cannot attach the funds in the trust. However, creditors who supply the beneficiary with necessaries like medicine may recover from the trust. In a growing number of jurisdictions, the children and spouses of the beneficiary of a support trust may enforce claims for child support and alimony.
In the Matter of the Barkema Trust, 690 N.W. 2d 50
In this appeal, we must decide if the corpus of a support trust is included in the estate of the beneficiary of the trust upon death for purposes of a claim for recovery of Medicaid benefits provided to the trust beneficiary during her lifetime for nursing home care. The district court found the trust was included within the estate. Upon our review, we affirm.
I. Background Facts and Proceedings
George Barkema established a trust in his will. He left one quarter of the residue of his estate to three of his children, Richard, Doris, and Rose, to hold in trust for his fourth child, Lois. His will directed, “If possible, only the income from said share shall be used for Lois, however, if necessary for her proper support and maintenance, then the corpus of said trust may be invaded to the extent said trustees deem necessary.” George’s will failed to specify what was to become of the remainder of the trust corpus after Lois’s death. After George died, his children entered into an agreement providing that in the event of Lois’s death, the trust corpus was to be distributed in equal shares to Lois’s children, Dianne Gille and Gayle Torgenson. This agreement was filed with the court in 1978.
Years later, Lois began living in a nursing home. In 1998, Richard helped her apply for Title XIX Medicaid to pay for her medical expenses. Between the time when Lois began receiving Medicaid benefits and her death on April 14, 2003, the State Medicaid program paid approximately $55,000 for her care. However, the State never attempted to obtain income payments from the trustee or compel the trustee to invade the corpus for Lois’s support during Lois’s lifetime.
On June 2, 2003, Richard, as trustee, filed a final report, recommending that the remaining corpus of the trust (approximately $18,000) be distributed to Dianne and Gayle, pursuant to the 1978 agreement between the siblings. On June 25, 2003, Health Management Systems, Inc., on behalf of the Iowa Department of Human Services (hereinafter the Department), filed both a claim in the trust and an objection to the final report. It claimed it was entitled to the remaining corpus of the trust under Iowa code section 249A.5(2) (2003). On October 8, 2003, the district court granted the Department’s claim and ordered Richard to pay to it the remaining corpus of the trust and interest thereon. The district court based its decision on policy reasons and on what it perceived to be George’s intent. Dianne and Gayle appeal.
II. Standard of Review
This case was tried by the probate court in equity. See In re Roehlke’s Estates, 231 N.W.2d 26, 27 (Iowa 1975) (“A hearing on objections to a fiduciary’s final report is an equitable proceeding.” (Citations omitted.)); see also Iowa Code § 633.33 (2003) (stating that all matters are tried by the probate court in equity other than will contests, involuntary proceedings to appoint guardians or conservators, and establishment of contested claims). Accordingly, our scope of review is de novo. Iowa R. App. p. 6.4.
Iowa Code section 249A.5(2) provides:
The provision of medical assistance to an individual who is fifty-five years of age or older, or who is a resident of a nursing facility, intermediate care facility for persons with mental retardation, or mental health institute, who cannot reasonably be expected to be discharged and return to the individual’s home, creates a debt due the department from the individual’s estate for all medical assistance provided on the individual’s behalf, upon the individual’s death.
Thus, the Medicaid benefits provided by the Department to Lois created a $55,000 debt due to the Department upon her death. This debt is payable from Lois’s “estate,” which is defined as any real property, personal property, or other asset in which [she] … had any legal title or interest at the time of [her] death, to the extent of such interests, including but not limited to interests in jointly held property, retained life estates, and interests in trusts. Id. § 249A.5(2)(c ) (emphasis added).
The Department argues the $18,000 remaining corpus of the trust is an “interest in [a] trust,”Id. and is part of Lois’s estate, from which it can collect its $55,000 debt. Dianne and Gayle, however, contend that the trust terminated upon Lois’s death and that she therefore had no interest in the trust “at the time of her death.” See Id.
Our first task is to classify the trust at issue. Because the corpus of the trust could only be invaded “if necessary for [Lois’s] proper support and maintenance,” the corpus of the trust was held in a form of support trust. See Austin Wakeman Scott, Abridgement of the Law of Trusts § 154 (1960) [hereinafter Scott on Trusts] (defining a support trust as one in which the trustee is directed to distribute so much “as is necessary for the education or support of the beneficiary”); accord Strojek v. Hardin County Bd. of Supervisors, 602 N.W.2d 566, 570 (Iowa Ct. App. 1999) (“The terms of a support trust require the trustee to pay or apply so much of the trust’s income or principal as necessary for the beneficiary’s care or education.” (Citation omitted.)). There are two types of support trusts: (1) pure support trusts, and (2) discretionary support trusts. See George Gleason Borgert & George Taylor Bogert, The Law of Trusts and Trustees § 229 (2d. ed. 1993) [hereinafter Bogert on Trusts]; see also Strojek 602 N.W.2d at 570; Smith v. Smith, 246 Neb. 193, 517 N.W. 2d 394, 398 (1994); Evelyn Ginsburg Abranavel, Discretionary Support Trusts, 69 Iowa L.Rev. 273, 278-80 (1983) [hereinafter Abranavel].
A settlor creates a pure support trust “[i]f a trustee is directed to pay or apply trust income or principal for the benefit of a named person, but only to the extent necessary to support him, and only when the disbursements will accomplish support.” Bogert on Trusts § 229 (emphasis added). In contrast, a settlor creates a discretionary support trust if “the stated purpose of the trust is to furnish the beneficiary with support, and the trustee is directed to pay to the beneficiary whatever amount of trust income [or principal] the trustee deems necessary for his support.” Bogert on Trusts § 229; see also Smith, 517 N.W. 2d at 398 (describing a discretionary support trust as a hybrid of a pure support trust and a pure discretionary trust). Generally, if the trust is a discretionary support trust, the beneficiary has a right that the trustee pay him the amount which in the exercise of reasonable discretion is needed for his support …; and the beneficiary can transfer this interest or his creditors may reach it, unless it is protected by a spendthrift clause. Bogert on Trusts § 229; see also Bureau of Support v. Kreitzer, 16 Ohio St.2d 147, 243 N.E.2d 83, 86 (1968) (stating that “the words ‘care, comfort, maintenance and general well-being’ are to be deemed an enforceable standard of a fiduciary’s conduct to the extent of providing minimal support for a destitute cestui que trust” and that the state, as a creditor having provided support to the beneficiary, “may be considered to stand in [her] place to pursue whatever right, claim or remedy she may have, including such as she may have as a destitute cestui que trust”); Scott on Trusts § 187 (stating that although a trustee has discretion whether to make distributions, “if he is directed to pay as much of the income and principal as is necessary for the support of a beneficiary, he can be compelled to pay at least the minimum amount which in the opinion of a reasonable man would be necessary”); Lawrence A. Frolik, Discretionary Support Trusts for a Disabled Beneficiary: A Solution or a Trap for the Unwary?, 46 U. Pitt. L. Rev. 335, 342 (1985) (explaining that when a trust is a discretionary support trust, “the trustee can be required to distribute sufficient income to the beneficiary to provide at least a minimum level of support”).
The language used by George Barkema created a discretionary support trust. The trust agreement contained a support provision and provided directions for the trustee to use the trust corpus if necessary for Lois’s support and maintenance. By using the words “to the extent said trustees deem necessary,” it gave the trustees some discretion as to whether to invade the corpus, see Bohac v. Graham, 424 N.W.2d 144, 146 n.3 (N.D. 1988)(finding a discretionary support trust when the trust allowed the trustee to invade the corpus as he “may deem necessary” for the beneficiary’s support; stating that “inclusion of the support language suggests an enforceable standard requiring the trustee to provide a minimum level of support to the beneficiary” (citations omitted)).
Having determined that the trust at issue was a discretionary support trust, we must next determine whether Lois’s interest in the discretionary support trust is the kind of interest encompassed by section 249A.5(2)(c). In construing a statute,
[o]ur goal is to determine the intent of the law, gleaned generally from the statutory language. We also consider the statute’s “subject matter, the object sought to be accomplished, the purpose to be served, underlying policies, remedies provided, and the consequences of the various interpretations.”
Cox v. State, 686 N.W.2d 209, 213 (Iowa 2004)(citations omitted). Thus, we begin by examining the statutory language.
The phrase “interests in trusts” is not defined in chapter 249A. See Iowa Code ch. 249A. However, the legislature clearly intended to define “estate” broadly, and to include more than legal title, because it defined it to include any “legal title or interest.” Id. § 249A.5(2)(c ) (emphasis added). It also chose to define “estate” more broadly than the federal Medicaid law. The federal statute provides that “estate” “shall include all real and personal property and other assets included within the individual’s estate, as defined for purposes of State probate law.” 42 U.S.C. § 1396p(b)(4)(A) (2000). However, the federal statute provides that “estate” “may include, at the option of the State …, any other real and personal property and other assets in which the individual had any legal title or interest at the time of death.” Id. § 1396p(b)(4)(B). It appears our legislature sought to exercise its option by including interest in addition to legal title.
We next consider the purpose of the Medicaid recovery statute. As one court explained,
Congress mandated that [states participating in the Medicaid program] adopt estate recovery provisions and permitted states to adopt an expansive definition of “estate” to address the increased demand for Medicaid benefits from the nation’s aging population. In doing so, Congress intended to give states “wide latitude” in seeking estate recoveries. “Allowing states to recover from the estates of persons who previously received assistance furthers the broad purpose of providing for the medical care of the needy; the greater amount recovered by the state allows the state to have more funds to provide future services.”
Estate of DeMartino v. Div. of Med. Assistance & Health Servs., 373 N.J. Super. 210, 861 A.2d 138, 144 (2004)(citations omitted). The Medicaid program is designed to serve “individuals and families who do not possess adequate funds for basic health services. It is “ ‘the payer of last resort.’ ” Strand v. Rasmussen, 648 N.W. 2d 95, 106 (Iowa 2002) (citations omitted).
With this in mind, we find that a person has an “interest” in the trust to the extent the assets of a trust are actually available to a trust beneficiary, as that term is used in section 249a.5(2)(c) Cf. Linser v. Office of Attorney Gen., 672 N.W. 2d 643, 646 (N.D. 2003) (“Under both federal and state law, an asset must be ‘actually available’ to an applicant to be considered a countable asset for determining Medicaid eligibility.” (Citation omitted.)). “In order for an asset to be considered an actually available resource, an applicant must have a legal ability to obtain it.” Hecker v. Stark County Soc. Serv. Bd. 527 N.W.2d 226, 237 (N.D. 1994) (citations omitted). This approach is consistent with the purpose of the recovery statute and the broad language used by our legislature.
The Barkema Trust was a discretionary support trust that contained enough of a distribution standard to create an interest of the beneficiary in the corpus. The trustee was required to pay Lois, during her lifetime, “the amount which in the exercise of reasonable discretion [was] needed for [her] support.” Bogert on Trusts § 229. This gave Lois the legal ability to compel the trustee to invade the corpus of the trust and make distributions to her for her support. Consequently, she had an “interest” in the corpus of the trust. We next consider whether the interest was present at the time of her death.
Under the Medicaid recovery statute, the Department can collect its debt from Lois’s interest in the trust that she had “at the time of [her] death.” Iowa Code § 249A.5 (2)(c ). Gayle and Dianne argue that “at the time of her death” means “at the precise moment she died.” They claim Lois had no interest at the time of her death because the corpus passed to them upon her death by operation of law. We reject this argument for the reason expressed by the Minnesota Court of Appeals: “‘[A]t the time of death’ must be construed to mean a point in time immediately before death. Any other reading of this phrase would render the estate recovery statute meaningless because upon death, property immediately passes to beneficiaries.” In re Estate of Gullberg, 652 N.W. 2d 709, 713 n. 1 (Minn. Ct. App. 2002) (citation omitted). For example, besides interests in trusts, the Medicaid recovery statute includes jointly held property in the definition of “estate.” See Iowa Code § 249A.5 (2)(c ). Under property law, joint tenancy property passes by operation of law to the other joint tenant when one joint tenant dies. 20 Am. Jur.2d Cotenancy and Joint Ownership § 3 (1995). If “at the time of death” meant “at the moment of death,” the jointly held property would already have passed to the decedent’s joint tenant at the time when the decedent’s “estate” is to be defined for purposes of the Medicaid recovery statute. This interpretation of “at the time of death” would render the legislature’s inclusion of jointly held property in the definition of “estate” meaningless. “In interpreting statutes, we will assume that the legislature intends to accomplish some purpose and that the statute was not intended to be a futile exercise.” State v. Reed, 596 N.W.2d 514, 515 (Iowa 1999) (citing State v. Horton, 509 N.W.2d 452, 454 (Iowa 1993); Mallory v. Paradise, 173 N.W.2d 264, 268 (Iowa 1969)). Accordingly, we conclude the phrase “at the time of death” means the time immediately before the Medicaid recipient’s death.
Thus, the Department acquired Lois’s “right that the trustee pay [her] the amount which in the exercise of reasonable discretion is needed for [her] support.” Bogert on Trusts § 229. Richard, the trustee of the trust, conceded that the Medicaid benefits the Department provided to Lois were necessary for her support. Accordingly, the Department’s $55,000 debt may be collected from the remaining corpus of the trust.
For the foregoing reasons, we affirm the ruling of the district court.
NOTE-Medicaid and Trust Assets
The Barkema case involved a trust beneficiary who received government assisted. In that case, the court permitted the government to be reimbursed from the remaining corpus of the trust. The question is whether a person with a trust fund should be eligible for government benefits in the first place. In making that determine the first step is to classify the trust as self-settled or created by a third party. The second step is to ascertain whether the funds in the trust are deemed to be the resource of the beneficiary receiving the state support. For Medicaid purposes, the trust is considered to be self-settled if the person’s money was used to fund all or part of the corpus of the trust and the trust is established by him, his spouse or a person or court with the legal authority to act on his behalf or at his request or his spouse’s request. If the trust is categorized as a revocable self-settled trust, both the corpus and the income of the trust are considered to be resources available to the state-supported beneficiary. When the case involves an irrevocable self-settled trust, any income or corpus that under any circumstances could be paid to or applied for the benefit of the state-supported person could be viewed as a resource. Any resource will impact the person’s eligibility for Medicaid.
With regards to trusts created by third parties, a trust will not be considered a resource available to the person if it is established for a disabled individual from his property, by a parent, grandparent or guardian, or by a court and the trust provides that the sate will receive upon the persons’ death all amounts remaining in the trust up to the amount equal to the total medical assistance paid by the state. Discretionary trust created by the will of one spouse for the benefit of the surviving spouse is not deemed a resource available to the surviving spouse.